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When Two Are Fighting, Gold Wins

Commodities / Gold and Silver 2018 Mar 27, 2018 - 04:23 PM GMT

By: Arkadiusz_Sieron

Commodities

Do you hear the military march? The world’s largest economies are flexing their muscles and preparing for war. Will gold win the trade conflict between the United States and China?

So It Begins
Trade war. This topic dominated the recent days. Last week, President Trump announced plans for tariffs on about $60 billion of Chinese imports. In response, Liu He, China’s vice-prime minister, told Steven Mnuchin, U.S. Treasury Secretary, that China is ready to defend its interests. Indeed, on Friday the country announced plans to impose tariffs on about $3 billion of U.S. imports. So are we at war?


Markets Believe So
Investors worry that we are. As one can see in the chart below, the U.S. dollar plunged against the Japanese yen to the lowest level in 16 months.

Chart 1: USD/JPY exchange rate over the last five days.

The trade dispute has also shaken the stock markets. The S&P 500 Index fell like a stone at the end of last week, as the chart below shows. As investors turned on the “risk off” mode, they escaped into safe assets, such as the Japanese yen – and gold. The price of the yellow metal hit a 5-week high on Friday, almost reaching $1,350.

Chart 2: Gold prices (yellow line, left axis, London P.M. Fix, in $) and the S&P 500 Index (green line, right axis) in 2018.

But Are We Really at War?
The narrative about a trade war and the end of the liberal world order is really scary. No wonder that the media like it so much. There is something in it, that’s for sure. But let’s step back and take a look at cold facts.

First, Trump has signed a memorandum so far. It opened a 30-day consultation period to discuss tariffs and gave the Treasury Department 60 days to develop investment restrictions to prevent Chinese companies from purchasing U.S. companies with sensitive technologies. During that waiting period, Trump’s proposal may be watered down. The upcoming days may also create space for negotiations – investors shouldn’t forget that Trump is a great negotiator and some of his craziest initiatives may be just a way to increase his leverage in negotiations. The bluster is often more impressive than the following action.

Second, the damage to China should be very modest. We strongly oppose any protectionism, but the discussed tariffs may account for only about 0.1 percent of China GDP. The world will not collapse, not yet.

Third, China’s response was rather muted. The country targeted only $3 billion in additional tariffs on U.S. goods. And, what is crucial here, it didn’t put in the key U.S. export items, such as soybeans or Boeing, on the list. Hence, the fears of a total trade war may be a bit overblown.

Implications for Gold
The concerns about global trade wars are fundamentally positive for the gold market. You see, gold behaves like a currency. You can think about the yellow metal as a bet against the current monetary system based on fiat currencies, in particular the U.S. dollar. When it weakens, gold shines. And what determines the investors’ confidence in the greenback? Well, there are several factors, but government policy is crucial here. Not only monetary and fiscal policy, but trade policy as well.

As we explained in the February edition of the Market Overview, the rising protectionist rhetoric deteriorated the perception of the U.S. as a reliable ally. You see, the U.S. was the principal architect and backer of the liberal world order. Investors worry that this order is fading now. Even if this is not completely true, it’s quite reasonable to buy some gold as insurance, isn’t? Hence, the worries about trade wars should support gold prices. However, because they seem to be a bit overblown, we could see some correction on the way.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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